Fear of Fed: Where to hide in Asia?

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

The end of the cheap-cash era may not be good news for Asian equities, but it need not lead to an across-the-board stampede. The end of the U.S. Federal Reserve’s bond-buying programme has triggered fears of a liquidity drought. However, not all markets are equally vulnerable.

In some countries, stocks offer a margin of safety in the form of dividends. In Taiwan, Singapore and Malaysia, yields are above their long-term historical averages before 2008. Yields on South Korean and Hong Kong stocks, however, are much lower than in the past.

Taiwan looks the most attractive hiding place. Yields on the country’s stocks are currently 1.4 standard deviations higher than their pre-2008 average. With the fortunes of Taiwanese electronics and component makers closely linked to the wallets of U.S. consumers, Taipei stocks should prove less risky.

Malaysia, where dividend yields are 1.8 standard deviations higher than the average, also looks appealing. However, foreigners now own 48 percent of local government bonds, compared with 13 percent when the Fed started the first round of quantitative easing, according to Bank of America Merrill Lynch. A hasty retreat could put more pressure on the ringgit, which has fallen 3 percent against the dollar so far this month.

India and Indonesia will struggle to finance their large current-account deficits, and their currencies might weaken against a rising U.S. dollar. Crucial elections loom in both countries. Investors are getting little compensation for these risks: Dividend yields in India and Indonesia – as well as Thailand and the Philippines — are close to their historic averages.

Investors may be even less interested in Korea, where the dividend yield is 1.4 standard deviations below its historical average. It’s hard to see how expectations of earnings growth can be justified when Korean exporters are losing out to their Japanese rivals, consumers are struggling to pay down debt and the economy looks weak enough to slip into deflation.

So far, the sell-off has been broad. With the exception of Malaysia, most Asian equity markets are down between 5 and 10 percent, in local currency terms, since mid-May. If global liquidity continues to look for a new home this summer, expect investors to become more discerning.